• Overview. Wellcall’s net profit and revenue soared 8.3% qoq and 14.2% qoq respectively to RM43m and RM7.9m in 2QFY22, mainly supported by a massive global demand for industrial rubber hoses. Meanwhile, on a yearly basis, net profit tumbled 9.8% yoy despite 12.4% increase in revenue. Disappointing earnings were dented by higher freight costs due to a limited shipping schedule. Whilst, higher revenue was underpinned by higher orders from US customers.

• Key highlights. As for 1HFY22, the export market makes up 90.4% of total revenue, with the highest revenue contribution coming from the US/Canada market with 45.9% yoy growth. Moreover, exports and local markets increase by 11% yoy and 24% yoy respectively during 1HFY22 banking on massive demand in tandem with the gradual improvement in the global economic sentiment and trade momentum of the industrial hose market.

• Against estimates: Inline. 1HFY22 PATAMI of RM14.9m was within our and consensus’ estimates, making up 45% and 42% of the FY22 full-year forecast.

• Dividend. Declared 2nd interim DPS of 1.4 sen, bringing year-to-date FY22 DPS of 2.8sen. This translates into 2.3% dividend yield.

• Outlook. We are positive on Wellcall business outlook given its sustainable market share in the industrial rubber hose industry. Moreover, its zero-inventory business model is likely to keep its costs under control. Despite higher operating costs due to hike in raw material prices as well as global supply chain disruptions, the Group’s operating margin is expected to remain stable given its purchasing raw materials strategy is to negotiate the prices beforehand and will transfer some of the additional costs to customers with a repricing frequency of 2 to 3 months.

• Earnings revision. No change to our FY232f-FY24f earnings forecast.

• Our call. Maintain BUY call with an unchanged target price of RM1.41. Our valuation is based on an average 3-years high PER of 19.3x and FY23f EPS of 7.3sen. We like this stock because of its commendable margin growth, healthy cash position, and attractive dividend yield.

Source: BIMB Securities Research - 30 May 2022